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Can you tell me about an S-Corp?

Generally speaking, when creating a new
business, your choices are to form a corporation or a limited
liability company. If you form a corporation, after forming the
entity you can apply with the Internal Revenue Service to elect to be
taxed as an “S Corp”. Then, in most states, like New Jersey,
after being approved by the Internal Revenue Service as an S Corp,
you then have to file with the state of New Jersey and apply to be
recognized as an S Corp for state taxation purposes. This may sound
like a lot of trouble, but the benefits to you as a shareholder are
large. It saves you from potentially being double taxed on the
corporation’s incomes and losses, since taxes on the income of the
corporation is generally only paid at the shareholder level not both
the corporation and shareholder levels. Additionally, it allows the
corporation’s income and losses to flow through to the shareholders
individually, based on their share ownership of the corporation.
Therefore, typically if you own 50% of the corporation shares, you
get taxed on 50% of the income or losses of the corporation.

How do you know
you qualify to be an S Corp. with the Internal Revenue Service? The
following is a general basic list of requirements to qualify to be an
S Corp.:

Be a domestic corporation;

Have only natural persons as
shareholders i.e. actual people (there are some limited exceptions
to that rule);

Have no more than 100 shareholders;

Have only one class of stock; and

Not be an ineligible corporation
(i.e. certain financial institutions, insurance companies, and
domestic international sales corporations).

The process of becoming an S Corp. is
straightforward, as it involves filling out forms in the proper order
within the proper time. But, for many business owners, it can be a
daunting task. This is one of the times I recommend working with an
experienced business law attorney and accountant to ensure your
filings are done correctly. The reason for recommending both an
attorney and an accountant, is that there are elements of both legal
knowledge and tax knowledge necessary to form the S Corp correctly.
Therefore, don’t try to do it alone. If you have any questions
regarding S Corps, feel free to contact me at
David@weinsteinlawyer.com.

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